This Gold Miner Goes Digging For A Mother Lode

Margaret K. Witte, chief executive of Vancouver-based Royal Oak Mines Inc., isn't to be taken lightly. Two years ago, union members at the company's Giant gold mine in Yellowknife rejected a cost-cutting contract. Witte promptly locked out the miners and recruited 220 replacement workers. Canada's only female mining company CEO drew death threats. Tensions soared when a mine explosion in late 1992 killed nine people. A union miner has been charged with setting the blast.

But Witte held her ground until late 1993, when a mediator hammered out a settlement. The endgame: Production costs at Royal Oak's Giant mine fell to $285 an ounce, from $395, putting the money-losing mine back into the black. Witte is now a pariah to labor. But she responds: "The mine would not be operational today if the company had not taken its stand."

Such doggedness should come in handy for what's shaping up as the biggest battle yet for the 40-year-old Witte. On July 7, she stunned the industry by making a hostile, $1.4 billion tender offer for Lac Minerals Ltd., a Toronto-based gold producer with 1993 revenues of $440 million--four times those of Royal Oak. "There's no question Lac will fight," says John R. Ing, CEO of stockbroker Maison Placements Canada Inc. "It's like a mouse trying to make love to an elephant."

MAKING WAVES. If Witte prevails, Royal Oak will join the ranks of North America's largest gold companies, producing some 1.5 million ounces a year. Even if she loses, Witte's bid has jolted "the stagnant gold business like a cattle prod," says Douglas B. Silver, president of Balfour Howell International, a Denver-based mining consultant. He sees "a new era of smaller gold companies making runs" at the big outfits.

"Peggy" Witte is used to making waves. After growing up on a 2,000-acre ranch, she was the only woman in her class to receive a masters in metallurgical engineering at the University of Nevada. She began building her own mining company in 1986 by buying mines at fire-sale prices, then vigorously cutting costs. The result: steadily rising earnings for Royal Oak. Last year, it posted record net income of $12 million on revenues of $104 million.

Lac is a far cry from the small mines Royal Oak has swallowed to date. But Witte figures it's vulnerable. Because Lac overpaid for some mines, it has posted anemic earnings, culminating in last year's $63.5 million loss.

Witte is offering Lac's investors a combination of Royal Oak stock and $400 million in cash worth about $10 a share, a 20% premium over Lac's share price on July 6. "That's near the top end of what Lac is worth," says Mike Jalonen, an analyst at Midland Walywn Capital Inc. Her plan: Slash some $40 million from Lac's overhead and exploration budget, giving the combined company a cash flow of $170 million next year, Jalonen figures, or seven times what Royal Oak will generate this year. Lac executives aren't commenting, saying it would be "premature to talk." But a fight is expected.

Some analysts rank Royal Oak's chances of prevailing in such a contest at no better than 50-50. The reason: Only 28% of Royal Oak's $1.4 billion bid is cash. The remainder would be financed by issuing some 250 million new Royal Oak shares. Another gold company could easily match Royal Oak's bid. And given the choice, investors would likely opt for a more established producer. "Large investors will wonder whether Witte's management team is capable of running Lac," says Silver.

Maybe so. But a loss wouldn't keep Witte down for long. "If this bid falls through, we'll just look for another acquisition," she says. Whatever happens, expect to hear a lot more from Royal Oak and its indefatigable CEO.

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